Is Cable the Right Complement to Verizon's FiOS Network?

Verizon (NYS: VZ) President and CEO Lowell McAdam made it clear this week during the UBS Warburg conference that they have a set a goal to where they ultimately want to reach in building out FiOS Fiber to the Home (FTTH) service.

During the event, McAdam said that, "for now, the bottom line is we are going to build out what we said and not any more."

While not setting a specific timeline or how many more markets it would reach with FiOS, the service provider has currently built out the service to 16 million POPs (point of presence) with ultimate plans to reach between 18-21 POPs.

However, McAdam added that if it can improve the cost structure on FiOS, it will look at ways to scale it further.

"We developed a strategy with FiOS whereby if it puts FiOS down the street regardless of the services on the street, we're going to move everything over to FiOS and get the copper out of service," he said. "That changes the scale and the cost structure associated with FiOS. If I can get some rhythm on that and be more efficient on the ONTs, and what goes on inside the house, the economics of FiOS becomes better."

Before they reach their buildout goals, one area that Verizon is likely to continue to pursue with FTTH is the multidwelling unit (MDU), particularly in the New York City market.

"The big opportunity for us with FiOS is the MDUs," McAdam said. "If you go into New York, it's been one of the higher incremental gain penetration markets for us because we gotten into these MDUs, and I think that will be a great opportunity for us."

It's not a bad time to target MDU FTTH opportunities either.

The advent of compact optical network terminals (ONTs) by manufacturers like Alcatel-Lucent (NYS: ALU) and Motorola (NYS: MSI) in addition to new advancements fiber connectors, conduits and other innovations like bendable from the likes of Corning and 3M are making it easier for service providers to deploy FTTH services in buildings built well before the age of fiber.

While its flagship New York City and other large cities in its footprint will be the focus of the MDU fiber drive, the service provider has yet to target areas like Boston.

Regardless, the timing for a speech on winding down FiOS deployments comes on the heels of its new agreement with three major cable operators -- Bright House, Comcast and Time Warner Cable -- to purchase their spectrum and a series of joint service cross-selling agreements of each other's products and services.

The move with the cable operators announced last week provides an obvious benefit to its wireless network with a supply of unused spectrum from the joint cable operator-run Spectrum Co. However, the deal also has some interesting implications for the wireline network.

In addition to Comcast (NAS: CMCSA) and Time Warner Cable (NYS: TWC) reselling Verizon Wireless services, Verizon itself will be able to potentially resell cable services, including high-speed data and video, as part of an integrated quad-play bundle that would include wireless/wireline services to serve customers outside of its existing FiOS footprint.

Given the fact that FiOS is not universally available across its footprint, Verizon's plan allows it to quickly ramp up a suite of higher speed broadband and video services to customers that have had little options besides slow DSL service and satellite service.

Of course, the details such as pricing and what and where such a bundle of how exactly this will work out are still in question. In addition to having a quad bundle, McAdam said potential applications could include videoconferencing applications that work, for example, between the PC, the TV and the tablet computer.

This is not the only time telcos and cable operators have worked together, nor that a telco had a major stake in a cable operator. The former US West, now CenturyLink (NYS: CTL) , had a separate division it held under its US West Media Group.

Later, the legacy AT&T (NYS: T) led by then-President and CEO Mike Armstrong beat out Comcast to purchase the assets for a whopping $62 billion as part of his dream to reenter the local phone business. Ironically, Comcast ended up purchasing AT&T Cable/AT&T Broadband.

While it's clear that Verizon sees light at end of the FiOS deployment tunnel, and the relationship with cable allows it to quickly ramp up its service portfolio, hopefully it will tread carefully and steer clear of the mistakes others made in the past.

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